1. Field of the Invention
The present invention relates to a method and system for estimating the liquidity requirements for pools of assets. In particular, the present invention relates to a method and system for measuring the liquidity needs of pools of assets whose finding needs are related to their issuers' ability to access the commercial paper markets.
2. Description of the Related Art
As known to those of ordinary skill in the art, commercial paper (“CP”) is a short term unsecured promissory note, typically issued by a corporation. Commercial paper offers a low-cost alternative to a bank loan, allowing the issuer to quickly raise finds without a complex or expensive Securities and Exchange Commission (“SEC”) registration. As such, corporations rely on exemptions under the Securities and Exchange Act (such as under Section 3(a)(3) of the 1933 Act) to avoid the requirements for registration of their commercial paper. This exemption requires that the paper be a short-term security with certain characteristics. The maturity is limited to less than 270 days and the notes are of a type that is ordinarily not purchased by the general public. In practice this means that the notes have maturity of about 30 days, and minimum denominations are often between $100,000 and $1,000,000.
Because financing needs of the corporation often run beyond the typical 30 day maturity of commercial paper, the corporations need to roll-over the paper (i.e., issue new commercial paper on or before the maturity date), and have sufficient liquidity to satisfy the obligation if they are unable to roll-over the paper. The liquidity may be provided by bank lines-of-credit and cash reserves of the corporation.
Of course, as with any financial transaction, there are instances where the financial needs and credit-worthiness of a corporation changes (rating change) and the corporation is unable to roll-over the paper, or is required to pay the obligation from their cash reserves or draw on their line-of-credit. There are also instances where the corporations default on their commercial paper. As a result, there is historical data available to show probabilities of rating changes as well as the need for corporations to draw on their liquidity.
While corporations and other entities issue commercial paper as unsecured instruments, as described above, it is also known for entities to issue a form of commercial paper that is called asset-backed commercial paper. Asset backed commercial paper (“ABCP”) ties the risk of the paper directly to the creditworthiness of specific financial assets, typically some form of receivable. These various known aspects of commercial paper and asset backed commercial paper are generally described in ABCP Market: Firmly established and still expanding, J. P. Morgan, May 23, 2000, (the disclosure of which is incorporated herein by reference).
At present, the liquidity needs of assets whose funding needs are related to their issuers' ability to access the commercial paper markets are met by financial guarantees and/or loan commitments sized at 100% of the related commercial paper program. Although diversification benefits exist across pools of these assets, financial institutions who provide these guarantees are unable to take advantage of these diversification benefits. As a result, in order to support the liquidity needs of a pool of these diverse assets, financial institutions must provide a very large amount of liquidity, i.e. 100% of the commercial paper programs of the supported assets. This is expensive and inefficient. Many financial institutions are reaching the limits of their ability to provide this liquidity.
It is known to provide less than 100% liquidity for certain ABCP. These known circumstances are strongly related to the underlying assets and performance characteristics of the underlying assets. Eureka! is an example of one such proposal. However, reduced liquidity is not available for all ABCP, or at least a much broader range of ABCP.
Methods and systems are needed to provide a means for assessing the true liquidity needs of pools of these assets. This allows for the more efficient use of the limited resource, i.e., the balance sheets of the financial institutions, resulting in lower costs, greater efficiency, and more supply of liquidity in the marketplace.
The preceding description and citation of the foregoing documents is not to be construed as an admission that any of the description or documents are prior art relative to the present invention.